Part II: The Expropriation of Subsurface Rights in the Oil and Gas industry as a Tool for Radical Socio-economic development

As discussed in part I of this blog, the effects of imperialism and colonialism are still prevalent in the African oil and gas industry. Transnational Oil Companies aim to exploit the continent's natural resources while reducing what is due to the states as far as possible. To effect the industry's transformation and eliminate the threat of being exploited, weakened institutional systems must be developed. The development of institutional systems is a process that involves the re-organisation or restructuring of economic, legal and social systems to address the socio-economic struggles in developing countries.[1] The restructuring of these systems is often met with resistance from those whose interests in natural resources may be limited as a result. It is, therefore, imperative that states are afforded the right to exercise control over their natural resources and the freedom to make decisions in respect thereof without undue outside interference.

Expropriation to enforce permanent sovereignty

The UN General Assembly Resolution 1803 affirmed this right for development and control by providing that all states have the right to permanent sovereignty over their natural resources, and this right must be exercised with national development and the well-being of the people of the state in mind.^[2]  The right to permanent sovereignty over natural resources is a recognized international right. It includes the authority to expropriate or nationalize subsurface rights and foreign investments. This right aims to promote economic cooperation among states and to establish processes that will eliminate neo-colonialism and apartheid, along with their consequences. Therefore, the expropriation of subsurface rights may help promote socio-economic development in resource-rich countries.

Further, the right to expropriation could empower the state to terminate exploitative concession agreements that impede the state from acquiring maximum economic benefit from the exploitation of its natural resources. The Republic of Chad has recently passed a bill to take over the ownership of petroleum assets and rights that were previously acquired by Savannah Energy PLC from ExxonMobil Corp. The Chad government has contested this transaction, claiming that the final conditions of the agreement were significantly different from those presented to them a year ago. Djerassem Le Bemadjiel, the Minister of Petroleum and Energy, has stated that this transaction could potentially harm Chad's public order and economic progress.

Expropriation in the South African Context

South Africa’s upstream petroleum industry is in its nascent stages and effectively has no local oil and gas production. At present, South Africa produces its oil and gas resources from coal and imported crude oil. Estimates suggest that South Africa has up to 390 trillion cubic feet of natural gas that can be used for energy production. Econometrix estimates that if only 5% (570 billion cubic meters) of South Africa's resources are economically recoverable, it will add more than R80 billion, or 3.3% per year, to the gross domestic product for 25 years.

South Africa will auction ten new onshore blocks for shale gas exploration in 2024-2025 once the Upstream Petroleum Resources Bill is passed. This is likely to attract TOCs who have significant initial capital to invest in the development of South Africa’s Upstream petroleum industry. Therefore, expropriation may be a necessary tool to protects South Africa’s interests.

Muller defines expropriation as the state’s power to unilaterally terminate “all entitlements of particular property right holders for public use or public purposes” under lawful and constitutional circumstances.[3] Section 24(2)(a) of the Constitution of the Republic of South Africa, 1996 (“Constitution”), provides that “property must be expropriated in terms of the law of general application for a public purpose or in in the public interest”. The Constitution further states that ‘public interests' include the nation's commitment to land and related reforms to promote equitable access to South Africa's natural resources by all people.[4] The Constitution does not define “public purpose”. Legal scholars such as Van der Walt propose that the inclusion of the public purpose requirement is usually inserted into constitutional property clauses to prevent the arbitrary use of the state’s power to expropriate private property for unlawful purposes.[5] Further, the insertion of this requirement ensures that the function of the property clause of protecting private property rights does not impede the constitution's commitment to facilitate land and related reform.[6]

According to Section 55(1) of the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA), the Minister is allowed to expropriate land and its associated rights in order to fulfil the objectives outlined in sections 2(d) to (h) of the MPRDA. These objectives aim to increase opportunities for historically disadvantaged individuals to participate in the mineral and petroleum industry, promote economic growth and development, create employment, improve the socio-economic welfare of all South Africans, and ensure sustainable development and environmental safety. This provision upholds the transformative nature of the Constitution.

Seeing that expropriation involves the permanent (and sometimes temporary) deprivation of internationally recognised private rights that hold economic value, as well as the elimination of any entitlements of ownership over the property, the expropriated party must be compensated for any financial loss suffered.[7] However, the petroleum industry is capital-intensive from TOCs and foreign investors for conducting exploration and production projects. Therefore, the expropriation of exploration and production rights from TOCs may interfere with high-cost projects and the full or market price compensation. The full or market price compensation may be too expensive for developing states with scarce financial resources that need to be allocated towards other areas of need, such as public health and access to education.

The UN General Assembly Resolution 1803 declared that compensation must be determined in accordance with the domestic laws and rules of a particular state, taking such measures in accordance with the practice of permanent sovereignty over natural resources and international law.[8] There is currently no evidence of full or market value asa standard for compensation recognised by international law. Section 25(2)(b) of the Constitution provides that the amount of compensation must be agreed upon by the relevant parties or decided by a court. Further, the amount of compensation determined must “reflect an equitable balance between the public interest and the interest of those affected” having regard to various factors including the history of acquisition and the use of the property, and the purpose for the expropriation.[9] It is evident that the determination of compensation will be influenced by the history of mineral and petroleum rights in the pre-constitutional dispensation as well as the constitutional mandate of reform in the petroleum industry.[10] This influence provides for a compensation award that is well below the market value, which works in the favour of all developing states.

Part III of this blog discusses the potential negative impacts of expropriating subsurface rights for the transformation of the petroleum industry in the South African context.